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Corporate-Level Strategy and Long-Run Profitability

Chapter 7

Essentials of Strategic Management, 3/eCharles W.L. Hill | Gareth R. Jones

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Corporate-Level Strategy

The principle concern: to identify the industry or industries a

company should participate in to maximize long-run profitability

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Concentration on a Single Industry A company chooses to focus its resources

and capabilities on competing successfully within the confines of a particular product market

Examples of companies that pursue 1 strategy: McDonalds Starbuck’s Neiman Marcus

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Concentration on a Single Industry (cont’d)

Advantages Concentrates all

resources and capabilities to strengthening its competitive position in one industry

Disadvantages Vertical integration

may be necessary May miss out on

other opportunities to create more value and increase profitability

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Horizontal Integration

The process of acquiring or merging with industry competitors to achieve the competitive advantage that comes with large size

Merger- an agreement between two companies to pool their resources in a combined operation

Acquisition - Occurs when a company uses capital resources to purchase another company.

An increase in horizontal integration = an increased level of concentration in an industry

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Horizontal Integration

Advantages Lowers operating costs Increases product

differentiation (can be accomplished through product bundling)

Reduces rivalry within an industry

Increases bargaining power over suppliers and buyers

Disadvantages Problems with

merging cultures, managers and operations.

Problems with the Federal Trade Commission if a company grows too large

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Vertical Integration

Expanding operations into industries that produce inputs or into industries that use, distribute, or sell the company’s product

A company can enter a new industry to increase its long-run profitability

A company that concentrates on a single business may be missing out on the opportunity to create value through vertical integration

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Vertical Integration

Advantages Enables company to

build barriers to new competition

Facilitates investments in specialized assets

Protects product quality

Results in improved scheduling

Disadvantages May actually

increase cost of inputs

Suppliers have less incentive to be efficient

Ties a company into old, obsolescent, and high cost technology

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Diversification

A diversified company is one that operates in two or more industries in order to find ways to use distinctive competencies to increase the value of products in other industries to consumers and to increase long-run profitability

A company may choose to diversify when they have excess resources

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Diversification (cont’d)

Diversification can help a company create value in 3 main ways: Permitting superior internal governance Transferring competencies among businesses Realizing economies of scope

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Restructuring Restructuring- implementing strategies for

reducing the scope of the company by removing exiting business areas

Why restructure? Because the stock of highly diversified

companies is often assigned a lower valuation relative to earnings than stocks of less diversified enterprises

In an attempt to boost returns to shareholders

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Restructuring (cont’d)

Restructuring can be beneficial due to diminished advantages of vertical integration or diversification

Restructuring can be a reaction to: Managers pursuing too much diversification Diversification for the wrong reasons Failed Acquisition

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Exit Strategies

Three main exit strategies: Divestment- most favorable Harvest- only works under specific conditions Liquidation- least favorable

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Divestment Selling a business unit to the highest bidder A company can sell to:

Independent Investors Other Companies

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Harvest

Halting investments in order to maximize short-to-medium term cash flow

If employees catch on, morale can sink very quickly and the strategy may fail

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Liquidation

Shutting down the operation of a business or business unit

Least attractive strategy because the company is required to write off its investments in the unit that is shutting down